Unlocking Real Estate Financing Secrets: The Power of DSCR Loans
What is a DSCR loan?
DSCR stands for debt service coverage ratio
This is where real estate growth is fun.
First, let me state: I am not a licensed mortgage broker. I am speaking from my personal experience. Discuss this with your mortgage broker.
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When I started building my portfolio, I wondered how I could possibly get a loan for real estate. My income was not high. I did not have W2 income – I was self-employed. On paper, banks didn’t like me. They probably still don’t. LOL
I discovered a winning combination for our strategy of adding value:
Bridge loan, followed by a DSCR loan.
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Here’s how it works.
The bridge loan is often a hard money loan. That’s what we use. It’s a short-term loan (often 12 months) based primarily on the merits of the project. It’s designed to allow you to create value in the real estate.
Note: Hard money loans are expensive. But, they serve a great purpose. Be sure you have a good plan before getting a hard money loan or the interest will bury you.
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After we get the bridge loan, we add value to the property – renovations, better management, increased rents, etc.
Once the property is improved and stabilized (filled with renters), it’s time to refinance.
This is where the magic happens.
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There are numerous options that your mortgage broker can discuss with you.
What we use is a DSCR loan.
DSCR = debt service coverage ratio.
A DSCR loan has a minimum percentage – often 1.25%. If your project meets this requirement, essentially you will qualify for the loan.
The lender doesn’t need your income or tax returns.
Disclosure: You or your partner will typically need a minimum credit score and cash reserves. (Again, I’m not a mortgage broker. Talk to your lender for more specifics.)
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How do you calculate your DSCR?
Calculate your NOI (net operating income). This is your gross income minus all expenses except your principal and interest (P&I) payment.
Divide your monthly NOI by the monthly P&I payment. This is your DSCR.
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DSCR loans come in many varieties. LTV, LTC, 30-year fixed, variable, balloon, etc.
For our long-term holds, we prefer 30-year fixed LTV loans. But other options may suit your needs better.
Happy Investing!